6 important factors that could determine the income you’ll need in retirement

Category: News & United Kingdom

The question of how much income you’ll need once you retire is one you may well have asked yourself.

It’s certainly an issue that becomes particularly urgent and pressing as you get close to your planned retirement age, or even just start thinking seriously about the time after you stop working.

As is usually the case when it comes to financial planning, there is no obvious “one-size-fits-all” answer to that question.

Your circumstances will be unique to you and there will be many variables that could affect the level of income you’ll require.

To help get you started, read about six important factors that could have a bearing on how much income you’re likely to need once you stop working.

1. How much income you may need

Although it’s likely that everyone will have a different idea of how much income they need once they’ve retired, it’s worth bearing in mind some average figures relating to how much a comfortable retirement could cost you.

For example, the Association of Superannuation Funds of Australia (ASFA) tracks the income required to live both a modest and comfortable retirement.

In the quarter ending March 2023, they estimated that the required gross incomes to live a comfortable lifestyle from age 65 were AUD $70,482 for a couple and AUD $50,004 for a single person.

While there is no formalised collation of similar figures in the UK, a recent report in the Guardian did reveal that the equivalent figures of income required to lead a comfortable lifestyle were £54,500 for a couple and £37,300 for a single person.

You obviously need to bear in mind that these are only average figures and your own required income amounts will be subject to your personal circumstances.

2. Your current level of expenditure

A key determining factor when it comes to working out how much income you might need in retirement is how much you’ll be spending on a month-to-month basis.

A good starting point when it comes to ascertaining this is to look at your current expenditure.

There’s often an assumption that your spending will go down once you stop working – but that may not necessarily be the case. After all, it’s likely that when you are working, most of your financial expenditure takes place at weekends. But when you stop working, your weekends will effectively last for seven days each week.

If you list your current regular outgoings, how many of them will disappear or even reduce when you come to retire?

In reality, if you have a busy lifestyle before you retire, that’s unlikely to change – at least in the short term. In fact, you could actually get busier as you’ll have more time to do everything you want to do.

This is why having a good handle on your spending is so important. If you know what your outgoings are now, it can be far easier to plan ahead.

3. Where you’re planning to live

It’s important to bear in mind that the ASFA and the Guardian figures you’ve seen above assume no mortgage or rental costs.

Clearly, if you still have an outstanding mortgage on your property, you will need to factor this into your planning. You may even find it prudent to delay your retirement until you’ve cleared it, or ensure that you’ll have the means to pay it off if you do decide to stop working.

Where you live could also affect your regular outgoings and day-to-day living costs. Issues such as the availability of public transport and access to amenities will both affect your regular spending.

You may be planning to downsize and buy a smaller property. This could reduce your household costs – both in terms of heating and maintenance. If you’re living in Australia, a “downsizer” contribution can also give your super fund a handy boost.

However, against that you’ll need to factor in the costs associated with property purchase such as Stamp Duty Land Tax (SDLT) in the UK and the fact that moving to living outside a city or town, for example, may well increase your transport costs.

4. The items on your bucket list

It’s very likely you’ll have a bucket or “to-do” list of things you’ve promised yourself you’ll do when you stop working and have more time on your hands.

Big holidays abroad are the most common item that appear on such lists. If you have those planned, you will need to ensure you have sufficient funds available to pay for them, without having to reduce your retirement income if at all possible.

You may well also have other things you’ve promised yourself, such as home improvements, a new car, or taking up new hobbies.

So go through your list, or make one, and ensure you have a good idea of the potential expenditure required to help you tick off those goals.

5. The state of your health

Your health could well have an impact on your retirement income planning.

If you’re fit and healthy, especially in the years immediately after you retire, you will consequently be able to live a more active lifestyle.

If you’re in poorer health, your regular spending may be lower, but you might find that you’ll be paying more for private health insurance and other associated healthcare costs.

In the longer term, care costs may be a consideration, too. You may need to consider planning ahead, and you might feel it’s prudent to set some money aside for this purpose.

6. Potential family commitments

As well as assessing your own potential expenditure, you might also want to consider other financial commitments you may have to members of your family.

You could have children that you will want to help as much as possible with financial contributions. That could be in helping them get on the housing ladder, or supporting them with spending on your grandchildren.

Likewise, if you still have surviving parents or other elderly relatives, they too could affect your retirement income planning.

If you’re already in this position or anticipate that you may well be after you’ve retired, you may want to consider planning ahead to help facilitate this kind of expenditure.

It’s imperative to have a plan in place

Whatever your circumstances and intentions, it’s extremely important to have a plan in place.

By not leaving things to chance and knowing well in advance how certain personal factors could affect the income you might need, you can improve your chances of having the necessary arrangements in place to fulfil your needs.

Planning ahead gives you a better chance of being able to afford to do what you’ve always planned once you stop working.

Also remember your outgoings can be fluid in retirement. The amount you need in the early years after retirement may well not be the same as you need later on.

It’s important to remain as flexible as possible, and regularly review your plans – both before and after retirement – to ensure you’re on track.

Get in touch

If you have any queries regarding your retirement income planning, please get in touch with us.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of ATO and HMRC legislation, which is subject to change.